Question

Are Competitive markets efficient?

How do taxes lead to inefficiency?

Answer 1

In a competitive market, all gains from trade are realised hence the outcome is market efficient means there is no loss in efficiency and no furthur gains from trade between buyers and sellers to be obtained. however, a monopolist produces at a level of output where marginal revenue equals marginal cost and charges a higher price for an output less than potential output. There is deadweight loss which is the gap between the price charged by seller and paid by buyers and it is the loss obtained from producer and consumer's surplus. Taxes also cause the same effect making a wedge between price charged by seller and paid by buyers at a lower output leads to inefficiency.